The Federal Open Market Committee (FOMC) takes centerstage Wednesday when it delivers its rate decision at 2 p.m. ET.
After cutting short-term interest rates for the first time since the financial crisis, the FOMC is expected to cut rates by another 25 basis points at this week’s meeting.
Even as geopolitical uncertainty persists, most economists agree that a 50 basis point cut is unlikely.
“The Fed is almost certain to cut its policy rate by another 25bp at next week’s FOMC meeting to between 1.75% and 2.00%,” Capital Economics wrote in a note Friday. “But rising core inflation, the still-solid incoming activity data and the temporary thaw in the US-China trade war all support our view that the Fed will then skip a meeting, before cutting rates one final time in December.”
While economists and the market agree on a 25 basis point cut this week, views are divided on what the Fed’s monetary policy path will look like for the rest of this year. JPMorgan economists argue that after this week’s rate cut, no additional cuts are expected this year; however, Capital Economics believes one more cut in December looms. The Fed’s message will be critical for markets.
Given the two dissents at the July FOMC meeting, it is evident that policymakers are conflicted.
“We expect dissents, potentially on both sides,” Bank of America said in a note Friday. “We think it is very likely that Kansas City Fed's George and Boston Fed's Rosengren dissent in favor of rates on hold. Not enough has changed in the outlook to convince them of the need for additional cuts. It is possible we also have a dovish dissent from St Louis Fed's Bullard who would favor a 50bp cut. We suspect he will be OK with a 25bp cut and dovish language in the statement, but it remains an outstanding risk. In any event, the dissents will highlight that a division remains in the Committee. It’s up to Fed Chair Powell to deliver the dovish tone that the market expects.”
In addition, Fed Chair Powell’s messaging and tone will be closely monitored at the press conference following the FOMC’s decision. “The press conference itself is difficult to forecast,” UBS wrote in a note Friday. “Our expectation is that Powell will want to sound slightly dovish to maintain a bias toward easing. Doing so will preserve market pricing, which Powell has stressed has caused the easing in financial conditions this year.”
Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.
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